Thursday, December 18, 2008

Challenges remain for Amazon digital music service

By Antony Bruno

DENVER (Billboard) - After its first full year selling tracks from all four major labels, Amazon's digital music store has become the second-largest a la carte service, according to industry estimates.

But it's a very distant second to iTunes. Major-label sources say that they had hoped the company would have fared better than it did. Amazon has yet to release any sales figures for digital music, and it did not respond to interview requests for this story. But Piper Jaffray financial analyst Gene Munster estimates that Amazon will sell 130 million tracks this year -- a paltry sum compared with the 2.4 billion songs iTunes is expected to sell in 2008.

Those figures are skewed by the fact that iTunes operates in more than 20 countries, while Amazon just opened its first foreign store December 3 in the United Kingdom. But analyst estimates put Amazon's digital-music market share at about 8 percent, atop the "everybody else" category of services competing with iTunes. And that figure didn't go up as the year went on.

"The market share has remained relatively stable throughout the year," NPD Group analyst Russ Crupnick said. "I didn't see anything out there that would be a major game-changer. I'm not all that surprised."

Amazon took on major challenges. Entering a market dominated by an entrenched competitor isn't easy, and the company lacks a branded device to drive sales. Apple drives iTunes sales with its iPod, as the spike in downloads seen after the holidays suggests. And outside of a brief TV campaign supporting its Pepsi Stuff, which let consumers collect points redeemable for MP3s and other purchases, Amazon didn't do much marketing.

Amazon does have a few achievements to crow about, however. Its proportion of digital album to digital single sales is twice that of iTunes, according to the NPD Group. But its album sales are boosted by its weekly discounts, which offer catalog products for as little as 99 cents.

LURING NEW BUYERS

Labels hope that Amazon will expand the digital music market by attracting new customers. According to NPD Group surveys, only 10 percent of the music fans who bought tracks from Amazon also reported getting them from iTunes. Amazon's customers are predominantly male -- 64 percent, compared with 44 percent for iTunes. The service is also stronger with older demographics: A third of Amazon buyers are 26-35, another third 36-50. Most iTunes users are younger.

If Amazon is to grow aggressively, though, it needs to start poaching customers from iTunes. "There's an increasingly difficult challenge in getting new digital users," Crupnick said. "It's becoming a bit of a mature market. The easy pickings aren't there so much. The biggest challenge is trying to convince the person in the iTunes ecosystem to get out of it."

The labels hope that Amazon can do that next year. Piper Jaffray's Munster projects that Amazon's sales will surge 60 percent in 2009 to 208 million downloads. But labels believe that there's even more potential in the company's integration with MySpace Music and other companies like it. If Amazon can become the provider of choice for social networks aiming to sell digital music, labels say it could have an easier time challenging iTunes.

"Amazon was particularly interested in creating a seamless experience within MySpace Music," said MySpace CEO Chris DeWolfe, who added that more layers of integration are pending as the service evolves. "It's going to become more and more seamless (because) they were very serious about creating this experience and invested in it."

Amazon also made small deals this year. One allowed gamers playing "Grand Theft Auto IV" to tag songs in the soundtrack for later purchase on Amazon. Users of Google's G1 phone also have one-click access to the company's MP3 store, including integration with the popular Shazam song identifier application. Developing more such deals in 2009 will determine whether Amazon remains the leader of the also-rans or emerges as a real challenger to iTunes.